Just How Much Better Are BetterFi's Loans?
Comparing the actual cost of loans between products and between lenders can be tricky, even for those who have managed their credit cards, mortgages, and car loans for years. For instance, our maximum interest rate often raises eyebrows among those used to seeing their mortgage interest rate of 4%, but our loans are a very different beast. They are less secured, they are smaller, and they are what traditionally would be considered “riskier.” Compared to predatory consumer loans, though, they are far better.
“Convince me!” you say.
In this post we’ll compare BetterFi’s loans to Tennessee car title loans, also called “title pledge loans.”
Which are ..?
Every two years Tennessee publishes a report on title pledge loans — predatory loans that use a borrower’s car title as collateral. Predatory lenders in Tennessee can also offer deferred presentment loans (payday loans), “flexloans,” and “flexcredit,” but usage data on these is harder to come by and is often less reliable as it is not published by the state. Our loans are generally larger than payday loans since we prefer to consolidate clients’ expensive debt and they are sometimes secured by a car title, so title pledge loans make for a good comparison.
A title pledge loan is supposedly a short term loan. A person is in need of emergency money or is otherwise convinced to take out a title pledge loan (sometimes by a contract masquerading as a check), agrees to a one-month loan for an average amount of $924, and agrees to the interest-and-fee rate of 22% for one month. Title pledge lenders claim that their loans are intended only for short-term use, but they do nothing to prevent or reduce the use of these “short-term” loans as a very expensive long term solution to an immediate money problem. If the title pledge lender can make more money, why would they care?
Borrowers usually find that they cannot repay a title pledge loan loan after the first month is up — if they were in a tight spot to begin with, then the $1,127 owed 30 days later is probably still hard to come up with — and so they “renew” or “rollover” the loan, accepting another 22% in interest and fees for an extra month to pay back the entire loan. If you’re keeping track, a borrower already owes the lender over $1,330 only two months after taking out that $924 loan.
The average Tennessee title pledge loan borrower renews her loan 8.59 times.
A picture of the average number of babies (rounding down) that can be had in the amount of time the average Tennessee car title loan borrower stays in debt (9.59 months).
It is easy to agree to renew a title pledge loan and difficult to pay off a title pledge loan since a borrower owes the entire amount each month (very different from your mortgage), and so renewals are a common occurrence. According to the last report put out by the state (linked above), the average title pledge loan borrower renewed her loan 8.59 times (we will use 8 for our comparison below). For context, 10.62% of borrowers paid off their loan the first time it was due and 2.43% renewed 22 times. In Tennessee, title pledge lenders are required to begin reducing the principal by 5% of the original amount at the 3rd renewal, requiring the borrower to pay that bit back to rollover the loan — this forces full repayment after 22 renewals (and would cost our borrower over $2,540 in interest and fees).
For our comparison we will follow the trajectory of a hypothetical borrower Jane Doe. Jane takes out an average title pledge loan ($924) and renews her loan 8 times before being able to pay off her loan in full, and, as often happens, she makes the minimum payments starting at the 3rd renewal until miraculously being able to pay off the entirety of the remainder of her loan.
Jane Doe, maybe.
If Jane is indeed able to pay off the full amount of her loan after 8 renewals, she will have to pay $1,616.08 in interest and fees in addition to the $924 principal that she borrowed, meaning she would pay the predatory lender a grand total of $2,540.08 to pay off her $924 title pledge loan. If she is paying off all of the accrued interest and fees with that last payment after her 8th renewal, that single payment would total over $2,309. How many of us can swing a payment that huge? If she is unable to make that first payment of $1,127, this is the path she faces by renewing her title pledge loan. If any payments are late then Jane faces late fees that increase the amount even more. Jane will find that the design of short term loans is such that it becomes more and more difficult to pay off the loan as she gets more and more entrenched in debt to the title pledge lender.
Jane doesn’t look terribly happy.
Jane would need to pay $2,540 before paying off a $924 title pledge loan.
On the other hand, if Jane comes to BetterFi and takes out a loan for the same length of time (9 months) at our highest interest-and-fee rate, she will pay only $94.84 in interest and fees. Jane would only need to pay a total of $1,018.84 to pay off her $924 BetterFi loan, and her payments would be spread out over the 9 months. With BetterFi, Jane saves $1,521.24 — more than 1.6x the original loan amount — that she would have spent otherwise on interest and fees.
Think about some of the things Jane could pay for with $1,521.24.
Her last payment would be $113.20, just like each of her other 8 payments. Jane would not face a final payment of $2,309 to escape the debt trap, and she would not face the initial “choice” of either paying $1,127 one month after taking the loan or renewing the loan and getting stuck in the debt trap.
With BetterFi, Jane saves $1,521.24 that she would have spent otherwise.
Jane looks happier.
Part of the drastic difference in cost between BetterFi’s loans and predatory loans is that we offer installment loans — loans that are paid down over time and have interest calculated each month only on what remains borrowed. At our maximum rate of 2% per month, that 2% is calculated only on what remains unpaid. If a client of BetterFi’s pays down a $300 loan balance by $100, the 2% next month is calculated only on the remaining $200. With a predatory loan, the “renewal” each month is not paying down the loan but renewing the loan for the entirety of the original balance. A title pledge lender’s 22% is calculated on what remains borrowed, but what remains borrowed is usually the entire original amount.
Those of us who have access to financing via our banks, credit unions, or credit cards may not realize it, but one of the huge benefits of financing is its ability to spread the impact of a large expense over a period of time. This is important for those with liquidity and assets and becomes even more important for those with limited liquidity and few assets. Predatory short-term loans provide emergency money but actually drastically increase the impact of the one-time expense with which a borrower is trying to grapple. The loan gets kicked down the road a month at a time while growing and growing, becoming more and more likely to bring a borrower to financial ruin.
Let’s look at this graphic again:
But really — look at the size of that last orange payment.
In sheer dollar amounts equitable financing options can remarkably improve a borrower’s life. Last year we disbursed $23,861, which we very conservatively estimate saves our clients $27,820. The data indicate that in reality BetterFi is probably saving our clients far more.
At BetterFi we have already saved clients thousands of dollars simply by offering our clients an equitable and fair alternative to predatory loans, but we believe that everyone should have access to financial tools that make their lives easier — not harder.
If you are interested in making a social investment in our work, please press the button below.
We also know that some of this can complicated and we aren’t the best at explaining, so if you have any questions please feel free to leave them in the comments below and we will get back with you as soon as possible.
Thanks to Daniel Reche, whose baby photo we used (probably not of him as a baby), and thanks to thispersondoesnotexist.com for Jane Doe.